High infrastructural costs are cited by telcos as a reason why they advocate for compensation from OTTs in the form of revenue sharing or network usage fees. (Representational Image)
Dec 11, 2024 17:35 IST First published on: Dec 11, 2024 at 17:28 IST
With a staggering 900 million Internet users, India has seen a transformation in the communication and media ecosystem. By enabling user-generated content, real-time interaction, and personalised user experiences, Internet-based platforms have democratised information access and dissemination, allowing diverse voices to emerge. By enhancing accessibility, they have become key enablers of users accessing (that is, requesting) data and thereby “causing” traffic. According to some telcos and their estimates, services offered by Google and Meta collectively account for over 70 per cent and 82 per cent of mobile and home broadband traffic across Bharti Airtel and Vodafone Idea networks respectively. This pattern underscores a market increasingly driven by data consumption facilitated by Internet-based platforms, often known as over-the-top (OTT) platforms. However, telcos claim that this surge in data usage places significant strain on them, necessitating substantial investments in infrastructure to keep pace with growing demand. Telcos’ assertions regarding traffic causation are strongly contested by content application providers (CAPs) such as Google and Meta. Regulatory experts in other regions, such as the Body of European Regulators for Electronic Communications (BEREC) are also of the view that traffic is requested and thus “caused” by ISPs’ (that is, telcos’) customers.
Telcos own, invest in, and maintain the public network infrastructure that enables consumers to access messaging and communication services. In India, they have responded to the demand for high investments in infrastructure through various strategies, including raising tariffs. Recent tariff increases have led to a 46 per cent rise in the cost for consumers of basic 5G data plans. Despite these measures, telcos have faced a revenue shortfall. But, how sustainable are further tariff increases for both telcos and consumers?
The irony of ‘fair share’
High infrastructural costs are cited by telcos as a reason why they advocate for compensation from OTTs in the form of revenue sharing or network usage fees. Their argument is, on its face, simple: The “fair share” should be proportional to the subscriber base, revenue streams, and data volumes handled by these OTTs. Whereas, OTTs contend that while it is the consumer who “causes” traffic and not OTTs, nevertheless they have been investing heavily in complementary digital infrastructure which brings content closer to users, and thus saves telcos’ much of the transport costs. Between 2018 and 2021, OTTs have invested $120 billion globally in network infrastructure, focusing on subsea cables and data centers. OTTs argue that their investment model is distinct, targeting different areas of the network infrastructure compared to telcos.
Prior to digitalisation, telcos were capitalising on Value Added Services (VAS) that expanded beyond conventional voice calls, SMS, and data offerings. VAS enabled the subscriber to use the telephone, particularly the mobile phone for purposes like sending short messages, and pictures, playing games, listening to music, surfing the Internet, etc. Post-digitalisation, with the advent of OTTs, these VAS have now transformed into bundled tariff plans that include access to OTTs. Through this, telcos are also generating additional revenue as users tend to upgrade to higher-paying plans for more data; and there is a symbiotic relationship between telcos and OTTs, with content available on OTT platforms generating demand for broadband. For consumers, these bundled packages mean sheer convenience — they get only one bill for mobile services, internet, and all OTT subscriptions at subsidised rates. From this, it can be inferred that the financial burden of constantly improving the infrastructure has not stopped telcos from capitalising on the innovations brought in by OTTs. This raises the question of why OTTs should pay network fees if OTTs are only adding more value to telco offerings.
Risks of double charging the consumers
Telcos and OTTs operate on the principles of two-sided markets. The concept of two-sided markets has shifted the focus from traditional buyer-seller transactions to the role of an intermediary that facilitates these transactions. The critical question for these new economic models is determining which market side — buyer or seller — should bear the cost of the intermediary’s services. The pricing structure’s influence on the volume of transactions and the value created by the intermediary is paramount. This is directly related to the “fair share” debate. In a two-sided market, the intermediary generates value by appropriately charging one side of the market — either the OTTs or the end-users.
OTTs contend that the concept of a “fair share” will likely lead to additional costs for consumers which can have significant economic and operational consequences. For instance, the widespread adoption of WhatsApp in India is largely attributable to its free service model, which eliminates additional costs for users beyond their standard data plans. Users pay for data packs provided by telecom operators, which they can use freely across various services as they wish. Introducing additional costs for WhatsApp calls could fundamentally alter user behavior and hinder the service’s growth. The same is true of other popular services, such as Netflix and its ilk. This shift is likely to lead to decreased usage, as users may become deterred by the costs. This proposition also raises questions about double charging and fairness ultimately putting more financial burden on the consumers, with no corresponding guarantee that any contributions/additional charges collected by telcos would be invested in improved network infrastructure. Indeed, examples from other regions indicate a risk that monies collected would simply be used to return additional value to shareholders and/or fund out-of-country acquisitions of other businesses.
What should India do?
This issue is not unique to India, it has been a longstanding demand by telcos across the globe which has also prompted the European Union (EU) to consider whether there is any basis for levying network fees on OTT players. The European Commission (EC) has conducted two consultations in this area, with the results of these consultations showing that the majority of respondents were overwhelmingly against any network fee proposals. Indeed, the original 2023 proposals were rejected by 18 out of 27 EU member states. More recently, the Draghi report recommended supporting “commercial investment sharing between network owners and Very Large Online Platforms that use EU data networks to a massive extent but do not contribute to financing them.”
As these debates were going on in the EU, South Korea implemented a sending-party-network-pays (“SPNP”) regime that applies to some OTTs in the region. Consumers are worse off as a result, as Internet-based platforms are now partnering directly with Internet providers to circumvent the policy, leading to reduced traffic efficiency and market distortion. This has resulted in the highest average data packet travel time among developed countries, a significant downturn for a nation previously known for its excellent internet infrastructure. It has also sparked debates over the principle of net neutrality. Introducing asymmetric payments could incentivise providers to prioritise certain data packets, thereby undermining this principle.
Drawing lessons from global examples, telcos in India should refrain from demanding a “fair share”.
Jain is a researcher and Pandey Panday is the Regional Director of Asia at the Internet Governance Project (IGP) at the Georgia Institute of Technology
